My Troubled Obsession With Investing in Retail

I have a problem you guys. I’m way too interested in investing in retail.

I’ve spent much of my adult life in the retail business. My first real job was working in a grocery store, where I quickly rose up from annoying 18 year-old night crew stock boy to slightly more mature 21 year-old evening manager who was left in charge of people twice my age. I did that for a couple of years before being passed over for a promotion a couple of times. Probably because I was only 23. So I left and burned the place down on my way out the door.

No, I didn’t. In fact, some of the guys who work at that chain are still my friends. I still find myself talking to long-term staffers each time I go into the store. It’s a family owned company that manages to still feel small while growing to $100 million or so in sales. All-in-all it was a great experience and I have only good things to say about the people I worked with.

At least most of them. You still suck, Malcolm.

After a disastrous few years as the most mediocre real estate agent slash mortgage broker you’ll ever find, I went back into the retail business. This time I sold potato chips to a wide variety of retailers, ranging from Wal-Mart to convenience stores to crummy little hotels and bars.

It was then I really started to form opinions about the retail business. And they weren’t very positive.

The realities of retail

I won’t mince words. Retail is a shitty business that’s being crushed by the interwebz. And a number of other things.

There are inherent weaknesses in the sector. First, let’s talk about staffing. This post about retail employees picked up some traction this week after being featured in some obscure message board.

That’s what I call every message board that isn’t Reddit.

The post said most retail employees are terrible and don’t deserve to be promoted. Current retail employees disagreed with the usual objections. “I work hard!” “You can’t expect me to be on time EVERY day!” “I only missed three days this month!”

I used to think teaching was the profession that overrated themselves the most. It’s not. It’s your local grocery store cashier.

The situation isn’t going to get any better, either. Retail needs people with brains, and will even pay them accordingly. These folks rise up through the ranks quickly. But most people with a brain will avoid the sector. For obvious reasons.

It’s also a hella-competitive industry. All it takes to open up your own store is a little bit of capital and the ability to order stuff off the internet. I know someone who opened up her own clothing store with less than $2,000 in out of pocket costs after picking up all the hardware from another retail store that failed.

Grocery is a little better. You don’t get many ma and pa operators because it costs a few million to get a decent store up and running. But then you run into a different problem. How are you supposed to charge more for cereal when the store down the road is selling the exact same damn box for $2 cheaper?

And I haven’t even touched on people selling stuff on the internet, who can happily accept lower margins because they don’t have the expense of a physical store.

How to invest in retail in such a world

It’s easy. Don’t.

Oh, come on. That’s a cop-out answer.

Every retailer eventually goes to zero. It’s only a matter of time.

A&P dominated selling food in the first half of the 20th century. The chain practically invented the supermarket.

It’s currently in bankruptcy protection.

F.W. Woolworth founded his namesake stores starting in Utica in 1878. The company got so big that it ended up using the largest skyscraper in the world at the time — the Woolworth Building in NYC — as its headquarters.

The only part of Woolworth’s that’s still around today is Foot Locker.

Sears went from being a retail behemoth into a laughing stock. It merged with KMart a dozen years ago, because hey, why not try mixing turds with other turds?

And so on. There are a million of these. Hell, even YOUR BOY Warren Buffett was in the retail business for a few years before getting out.

Yeah, there are exceptions. Wal-Mart and Target were incredibly successful investments. So has Amazon and a bunch of other e-retailers. It’s a winner takes all world and certain companies have won. But that doesn’t mean you should be investing in retail.

My struggle

Most serious investors know enough not to touch retail. I just can’t help myself.

Value investors talk a lot about circles of competence. An investor should only put money to work in a sector he knows well. It’s why Warren Buffett doesn’t invest in tech. He doesn’t get it.

My problem? I know retail. I know it inside and out. Hell, I’ve been known to go into grocery stores for fun just to check out the merchandising standards. I can tell you who’s a good operator and who isn’t after going into a few stores.

But that stuff doesn’t matter. Safeway stores are consistently nice with great fresh departments. Yet Empire, its parent company, is down 50% in the last few years.

Reitmans, a stock I still hold, has consistently nice stores filled with good stuff. It’s ran by smart guys with a lot of experience and they’ve done a nice job closing down non-performing stores.

And yet in the three (plus) years I’ve owned shares, I’m up about 3% a year. Big whoop.

I need to realize something. Any edge I think I might have when it comes to investing in retail? I never had it. It’s time for me to get out of this god-forsaken sector, and I think y’all should too. Don’t be swayed by the hopes of a turnaround. Just leave and never come back. Trust me. It’ll be better that way.

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